By Colin Lloyd :
Last week, I met a friend at a café on Hanbury Street, beyond Brick Lane. This is the old East End of London, beyond Spitalfields. I was last there in 1988 - it bears testament to the success of London that an area which was once down at heel, is now clearly on the rise. The ethnic mix is extraordinary, but with a strong Asian bias.
This journey set off a train of thought about the demographic needs of the UK - along with many other European countries - and the current immigrant crisis. Added to this eclectic web of inter-connections are some ideas I've been forming about the future of education and healthcare.
The UK - An Historical Perspective on Refugees and Immigrants
The word refugee was coined during England's first "refugie" crisis, when Protestant French Huguenots escaped persecution in Catholic France. The "exodus" - clearly this wasn't the first refugee crisis in history - gathered momentum after Louis XIV revoked the Treaty of Nantes in 1685. As early as October 1681, The Protestant Mercury - a pamphlet distributed in London during the period - reported 600 Huguenots fleeing La Rochelle in four crammed boats. The map below shows the destination of the Huguenot diaspora over the period:
Source: The Huguenot Society
The great trading nations of the Netherlands and England, took the lions share (50%).
Of the Protestant Huguenots who came to England, more than half settled in London. Their arrival caused social tension, but they had an advantage in that Londoners were, for the most part, fiercely anti-Catholic. The Proceedings of the Old Bailey contains an interesting short history of the period:
The traditional and virulent anti-Catholicism of Londoners, in combination with propaganda depicting the atrocities committed against Protestants in France, ensured that the refugees had a surprisingly warm welcome. Despite threatened riots against French weavers in the East End in 1675, 1681 and 1683, and vocal opposition to the creation of a new French church at St Martin Ongars, there appears to have been little physical violence directed against the French refugees. More positively, particularly after the Glorious Revolution in 1688 and the accession of William and Mary, Huguenots received a remarkable level of charitable support. At the end of the seventeenth century, for example, some £64,713 was raised by royal brief for their relief, while William and Mary donated £39,000 to help Huguenot resettlement between 1689 and 1693 alone.At the same time, the concentration of French speaking immigrants in well defined communities ensured the survival of a distinctive culture and identity for several generations. Both their language and fashions set the French apart, and there were complaints about their unfamiliar diet. But they acquired a certain respectability. Even in 1738, William Hogarth could contrast the clothing and behaviour of a French Protestant congregation leaving church with the poverty, squalor and sexual immorality of other Londoners. And many prospective English gentlemen about to set off on the Grand Tour made an initial visit to the East End to polish their language skills.
Source: William Hogarth collection
If you are interested in the life and times of William Hogarth, I recommend a visit to the small Hogarth Museum , next to Chiswick House, in west London.
I was struck by the length of time it took for the Huguenots to become integrated in society. More than 50 years after the revocation of the Treaty of Nantes, they still formed a distinct minority - much like the Bangladeshi community today.
Fresh from the Huguenot influx, England rose to the challenge again. In 1709, during the reign of Queen Anne, the Poor Palatines arrived - more than 13,000 - although many were en route to the New World. Towards the end of the 19th century, more than 120,000 Jews arrived in Britain, fleeing persecution in Tsarist Russia and Eastern Europe - many settled in the area of London originally inhabited by the Huguenots. In fact, the L'Eglise de l'Artillerie near Spitalfields, originally a site of Huguenot worship, built 1766, has been a Synagogue since 1840. This article from the Jewish Museum contains a concise history:
Between 1881 and 1914 over 2 million Jewish people left Russia, Poland and the Hapsburg Empire. While the majority went to the United States, around 150,000 settled in Britain, mainly in areas near the docks where they had arrived, in the East End of London and in regional centres such as Manchester, Leeds, Glasgow and Liverpool.
Between the first and second world wars, Britain accepted a further 70,000 Jews, fleeing persecution. After 1945, more than 250,000 displaced Europeans became British citizens. From 1968 to 1974, the UK witnessed the arrival of 70,000 Asians, mainly of Kenyan and Ugandan origin. Many of these Asians, together with those from India, Pakistan and Bangladesh, now inhabit distinct areas around Greater London.
One building which epitomises London's approach to immigration is the Brick Lane Mosque . It is a tribute to the success with which the UK, and our European neighbours, can deal with a constant influx of immigrants - the perennial pattern of, at least, the last 300 hundred years. The building that houses this mosque was previously the Spitalfields Great Synagogue, however, it was built originally in 1743 as a French Protestant Church. Sadly Europe has an, at best, chequered record on assimilation and acceptance of ethnic minorities.
At the risk of being incendiary, the economic benefits of immigrant workers are always mixed. On average, immigrant workers are more ambitious - they had the courage to leave their home countries in search of a better life. They are inclined to work harder, will encourage their children to achieve more academically and economically, and they value the benefits offered by the government of their new domicile more highly than the indigenous population - theirs is not generally a culture of entitlement. All these aspects benefit society as a whole, but, immigrants also bring their own culture which, whilst additive in terms of diversity, may be at odds with the traditions of their adopted country. Immigrants are also more likely to take the jobs of the indigenous population - especially more menial roles. In the short term, they may impose a burden on their adopted country, yet in the long run, they repay the host countries investment with interest.
Carefully planned government policy is essential to minimise the economic and social tensions created by the boon of migrant workers, however, history is littered with examples of failure. For example, the Huguenots became prominent in silk weaving, but as China began to export fine quality cloth, during the second half of the 18th century, the British government passed in the Spitalfields Acts, this article from the Von Mises Institute takes up the story:
The Spitalfields Act of 1773 mandated that local magistrates in designated silk-manufacturing districts, but not in the country, set the
I shall leave it to the Von Mises Institute to rail against price controls - suffice to say the Spitalfields Acts, whilst reducing social tension in the short term, heralded the demise of the entire silk weaving industry in the long run. The acts were finally repealed in 1824.
The European Asylum Crisis of 2015
Today's refugee crisis is the largest Europe has faced since 1945. The Economist - Europe's migrant acceptance rates - described it thus:
Not since the second world war has Europe faced refugee flows of such complexity and scale as this summer's migrant crisis. The protests reported on September 1st involving hundreds of migrants at a railway station in Budapest-after Hungarian police barred their ongoing travel into Europe-were just the latest in a series of recent flashpoints from Calais to the Macedonian border.
The chart, which accompanied this article, says much more about the impact on a country-by-country basis. The data is from 2014 - this year Germany is expected to receive a four-fold increase.
The map below - from Mish Shedlock - shows the potential number of immigrant/refugees displaced by the Syrian civil war, of whom may be heading for the EU:
Source: UNHCR, Global Economic Trend Analysis
Europe's Demographic Cliff
Many books have been written over the past decade about the ageing of western society. Medical science continues to extend our "three score years and ten" whilst redistributive taxation, combined with house price inflation, among other factors, has helped to discourage procreation. 2013 saw the publication of The Demographic Cliff by Harry Dent - this 2013 Business Insider interview provides a precis:
Young people cause inflation because they
Germany has announced that it will take up to 800,000 Syrian refugees this year and is in a position to receive a further half-million per year thereafter. This is not unalloyed altruism, Germany has the fastest ageing population in Europe. Its workforce - 20 to 65 years - will fall from 61% of the total population this year, to 54% by 2030. During the same period, its overall population is expected to fall from 82mln to 78mln, whilst life expectancy will rise from 81 to 83 years for men and 83 to 85 years for women. In other words, Germany needs at least 5.5mln people of working age between now and 2030 to make up the shortfall, and its entire workforce need to retire two years later.
The Table below is from 2014 and shows the demographic breakdown of Asylum applicants to the EU-28:
Germany stands out in terms of numbers, however, only 67% of these asylum seekers are of working age. For the EU-28, the working age component is 74%, but it must be assumed that a significant proportion of women will not be actively seeking work. At 20mln, non-EU immigrants account for just 4% of the total and 5% of the working age population. This June 2015 document from the EC - Migration in the EU - has a selection of other information which is worth reviewing.
This 2012 article from the Economist - All about taking part - points to some positive trends among the Pakistani and Bangladeshi communities in the UK, but it is now more than 30 years since their arrival in the UK.
Source: ONS, Economist
According to World Bank data, Syrian female labour force participation rates are low at 13%, the second largest source of asylum seekers, Afghanistan, is not much higher at 15%. The table below shows the labour participation rate for females, between 15 and 64, for a selection of countries which have a significant diaspora domicile within the EU:
Egypt, Arab Rep.
Syrian Arab Republic
United Arab Emirates
West Bank and Gaza
Source: World Bank
*Bangladesh female participation is high due to agro-micro-finance and the garment industry - seethis ILO report
By my rather unscientific estimate, only about 45% of the current influx of immigrants will participate in the labour force - at least initially. The table below shows the main countries of origin of EU asylum seekers in thousands for 2013 and 2014:
Syrian Arab Republic
Iran, Islamic Rep.
Germany would need to accept 800,000 immigrants per annum to address its demographic deficit. These need not - indeed, will not - be exclusively asylum seekers. The gloomiest forecast I've encountered, from the U.S. Census Bureau , estimates the EU will experience a 14% decrease in its workforce by 2030 - more than 50mln people - meanwhile the total population of the EU-28 is forecast to grow by 10mln to reach 518mln by 2030. The demographic dividend of immigrants is self-evident, as this Eurostat chart makes clear:
Sadly, the greatest benefit is derived from the addition of female non-residents - the female participation rate of Syria (13%) and Afghanistan (15%) is sub-optimal.
This article from Eurostat - Being young in Europe today - demographic trends - provides more detail on the opportunities and challenges facing the young across the EU.
Messrs. Mauldin and Gartman chimed in this week - in Thoughts From the Front Line - Merkel Opens the Gates- Mauldin writes:
Merkel's immigration plan presents huge problems, given Germany's generous retirement benefits and social programs. For every baby boomer that stops working, the country needs at least one person to start working. The US is in better shape only because we have enough legal immigrants to keep the demographic pipeline flowing. Even so, we will hit the wall at some point unless more and more potential retirees keep working.Germany is in much deeper trouble on this point, and Merkel knows it. I suspect she wants to bring in quite a few million immigrants, somehow make good Germans out of them, and keep the economy humming.My good friend Dennis Gartman wrote about this in his September 15 daily report:But there is a very real demographic reason why Germany is so willing to take a surfeit of these refugees: German's demographics demand it. Simply put, Germany's population… and especially its indigenous… population is imploding swiftly and certainly.Already there are very real shortages of young, skilled workers, and many German companies openly and regularly complain that they cannot hire enough workers to fill job vacancies because there are not enough workers available for those jobs.Further, Germany needs younger workers to fill those jobs because it needs their salaries for the social welfare programs that Germany is so renowned for. Simply put, there are not enough workers paying into the social programs to pay for them at present, and this problem shall become worse, not better, unless Germany's population swells measurably in the coming years and decades.So, Ms. Merkel has a clear ulterior motive for her seeming generosity: she wants the present welfare system in Germany that benefits now and will even more greatly benefit more in the future her normal constituency. If Germans are going to retire they shall need either newly born Germans to take their place and pay into the social security systems or Germany shall need to
The numbers seeking asylum in the EU rose from 431,000 in 2013 to 626,000 in 2014 - this year it will be higher still - but the total number of immigrants arriving in the EU declined from 748,000 in 2010 to 539,000 in 2013. The table below, from Eurostat , shows the main country origin of migrants to the EU in 2013:
In total, emigrants from Turkey and Morocco top the Eurostat list of EU immigrant residents:
According to the CIA Factbook, the average age of the population of Turkey is 29.6, for Morocco 28.1, Syria is younger still at 23.3 whilst in Afghanistan it is 18.1 years. The EU-28 average age is 42.2 years. Turkey, with a population of 75mln, first applied to join what was then the EEC in 1987, the most recent negotiations took place in 2013. Its accession would solve the majority of the EU's demographic problems, but Turkey's integration would be a far from simple political and cultural process.
Whilst Europe's demographic problems could be solved by immigration policy, an unskilled, uneducated workforce will not create the productivity growth required to insure social cohesion. Education is key, as this essay from the European Parliamentary Research Service - Higher education in the EU: Approaches, issues and trends - points out. The cost of education in the EU is lower for students than in the US - sadly the cost to the tax payer is higher, and the number of tax payers looks destined to fall unless immigrants fill the gap. The U.S. spends 2.8% of GDP on higher education - the OECD average is 1.6%. Only 36% of U.S. expenditure comes from public sources - the OECD average is 68%. Technology provides a tangible answer to the problem of affordable provision:
In spite of the fact that the United States is still the global leader with 17% of international students, the EU is increasingly popular with the United Kingdom, France and Germany accounting respectively for 13%, 6%, and 6% of world students.…While EU universities took more time to develop Massive Open Online Courses (MOOCs), they now account for approximately one quarter of MOOCs in the world and the numbers are constantly rising.
The accompanying March 2015 paper - Higher Education in the EU - provides some fascinating insights. Within the EU, Germany and Sweden have increased educational spending between 2008 and 2014 by more than 10% while the UK, Italy and Spain (among others) have cut expenditure by more than 10% - overall EU spending has declined in inflation-adjusted terms. The cost of higher education in the U.S. has surged 1,120% over the past 35 years, four times faster than CPI.
Open Educational Resources - the forerunner to MOOCs - began to appear as early as the 1980s and in 2001 MIT introduced its first free online content. Platforms such as Coursera, developed by Stanford University and eDx, funded by MIT and Harvard University, began to appear in 2011. There are now more than 2,400 MOOCs available, offered by over 400 Universities globally.
In 2013, a Harvard paper by Sergiy Nesterko - Evaluating Geographic Data in MOOCs - produced this registration data:
Coursera has 36% of the MOOC market - the map below - also from 2013 - shows how the global impact of MOOCs is evolving:
Source: Cartography Lab
Gary Matkin - UC Irvine presentation at the Open Education Global 2015 conference shows how rapidly technology is transforming the way we learn. He shows that in the two years since 2013 the percentage of U.S. student enrolling in MOOCs has dropped to 34%, Europe has risen to 26% (with a wider range of language options encouraging enrolment) whilst Asia now accounts for 21% of the total. As of March 2015, Coursera had 249,000 students enrolled in Career Readiness courses and a further 683,000 enrolled in undergraduate courses. The annual MOOC market, by extrapolation, is already 2.6mln students - and this assumes students take only one MOOC course per annum. This April 2014 article from Forbes - Moore's Law Touches Education At Last - To Techies' Delight - suggests I may be overly cautious, they estimate that 7.4mln student enrolled in more than 20mln classes between 2011 and April 2014. At that time, only 100 universities were involved; that number has quadrupled in 18 months.
Having taken four of Coursera courses in the last two years, I have been amazed at the incredible diversity of the students enrolled, both in terms of geographic location, ethnic background and level of education - especially students from China, the Middle East and Africa.
MOOCs and other forms of online education have a long way to go in terms of structure and interactivity - they remain a pale substitute to traditional teaching methods, however, the total global market for higher education is forecast to double by 2025 to 262mln. Technology provides an affordable, scalable solution.
Conclusion and Investment Opportunities
In attempting to make predictions about the investment opportunities which will flow from a reversing of the demographic deficit, I see long-term growth in equities and real estate. Nonetheless, between now and 2030, Europe needs to attract more than 50mln new workers. The challenge this entails is colossal, and it is unlikely that the process will be smooth. I call my Macro Letter service "In the Long Run", nonetheless the investment opportunities below are very long term in nature, and I believe, after the recent, interest rate driven bull market, there will be better levels to invest over the next decade or so - there's no rush.
Most commentators expect negative demographic trends in the EU to continue until at least 2060, with the associated economic costs that will involve. Whilst this may happen, I believe two strong economic counter trends are underestimated. Firstly, people will choose to work longer, especially as labour markets become more flexible, and secondly, immigrants will fill the declining workforce void.
Government finances will be stretched far more than is currently predicted. Housing must be provided - which in Germany may be relatively simple, but, for the rest of Europe, will require substantial changes to planning laws. Hospitals and schools will vie for public money more fiercely than in the past. Home schooling will become more common in the primary and secondary sector whilst MOOCs will evolve to fill the gap between university and the workplace. Technology will also help to reduce the cost of healthcare as this article by Stephen Duneier - Doctoring Deflation - explains - I quoted this article quite recently, I make no apology for quoting it again:
In America, there are roughly 200,000 primary care physicians, plus 56,000 nurse practitioners and 31,000 physician assistants who work to support them. That adds up to 287,000 diagnosticians. They take in information through samples and questionnaires, run the results through their encyclopedic minds, which were developed through years of medical school and on the job experience, and spit out their findings. They then prescribe a course of action, many of which are ignored, and/or medication. For clarity's sake, let me rephrase that. Primary care physicians and their colleagues collect data, run correlation analyses and present results. Sound like a job typically done by something other than a doctor?Yes, I'm implying that as a diagnostician, the primary care physician's role is very similar in nature to that of a computer. Here's the catch though. Ironically, the very thing that once allowed doctors to add value and charge commensurate fees, namely their encyclopedic knowledge, is now their greatest shortcoming.…The future of medical diagnosis is about to experience a radical shift. The same pocket sized computer which now holds the power to beat any human being at the game of chess, will soon be used to diagnose medical ailments and prescribe actions to follow, far more cheaply and with a whole lot more accuracy.
Europe is heading inexorably into a pensions and healthcare crisis, public borrowing will balloon and developed nation QE will be required to keep these economies from imploding under the burden of debt and interest payments. The prospect is alarming to anyone of a Puritanical bias like myself, but, in these Macro Letters, I write about what I think will happen rather than what I think should.
As European governments' tax base is eroded, they will be forced to borrow more. The ECB will be required to purchase a far larger proportion of the increased issuance. The yield curve may steepen during times of uncertainty, but the Euro will act as the main instrument of economic adjustment for the region. Asian currencies will tend to rise against the Euro and Germany, in particular, will benefit from the competitive advantages of a permanently weak currency. However, Germany will need to continue footing the bill for the profligacy of the rest of Europe - plus ça change . Debt will dampen growth and domestic inflation. Long-term returns will be disappointing, yet there will be plenty of tactical trading opportunities both long and short.
Near term - at least the next 15 years - the demographic headwinds will remain unfavourable. Pensioners will draw-down on savings and divest themselves of assets. The young will continue to be discouraged from starting a family because of the escalating cost of childcare and burden of student loans, combined with the excessive cost of housing (excepting Germany) resulting from the artificially low level of interest rates and planning constraints. Finally, after retiree asset repatriation has run its course, currency depreciation will foster import price inflation, meanwhile wages will start to rise relative to capital as the absolute number of people in the workforce declines. Pensioners, having divested themselves of their more liquid stores of wealth, will begin to draw down on property assets to supplement their inadequate pensions. In 15 to 25 years, depending upon the success of the EU immigration offensive, this demographic dynamic should begin to change.
The official retirement age across the EU will have to rise. More flexible part-time work will become far more prevalent. Retirees will defer asset liquidation for longer. The immigrant community, meanwhile, will begin acquiring assets, saving for their retirement and consuming as they start their own families. Equities will be supported by low interest rates in the near term - 15 years - and offer value long term as saving and investment finally rebound.
See also 3 Things: Confidence, GDP Forecast, And Market Rally on seekingalpha.com